Contrarian Investing - Are you following the herd?Posted by Marc Rasmussen on Thursday, January 15th, 2009 at 10:43am.
Are you following the herd? The herd of buyers who purchased a home in 2004 and 2005 may now be regretting their purchase now that prices have declined. In hindsight those who bucked the trend and got out the real estate market in 2004/2005 made a wise choice.
Should you be bucking the current trend and become a contrarian investor?
A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in securities and other assets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company's risks, and understates its prospects for returning to profitability. Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains. Conversely, widespread optimism can result in unjustifiably high valuations that will eventually lead to drops (2004 and 2005 real estate market), when those high expectations don't pan out. Avoiding investments in over-hyped investments reduces the risk of such drops.
Homes are more than just investments. They produce great memories with friends and family that you cannot put a price tag on. Regardless, you still want to be wise and cautious about investing in this market. Make sure you don't over extend yourself. Buy what you can afford and make sure this is a long term investment. We are back to old rules of real estate. Forget about flipping in the short term.